Q4 was another challenging quarter for Banking sector?

India's banking sector prepares to release its fourth quarter result (January 2017 – March 2017 period) for FY17, with IndusInd Bank and Yes Bank being the first one to announce their financial performance on April 19, 2017.

Previous three quarters of banking sector in FY17 were muted as they suffered from single-digit loan growth, excess liquidity, weak NII and lack of resolution to its non-performing assets (NPAs) problem.

Looks like Q4FY17 will also be no different. 

Net Interest Income (NII):

Led by weak credit growth and strong deposits, the NII is expected to have fallen in Q4. 

As per latest Reserve Bank of India's (RBI) data, bank credit growth have neared its six-decade low of 5.08% in FY17 as against 10.7% of FY16. Outstanding credit stood at Rs 78.81 lakh crore compare to Rs 75.01 lakh crore. Meanwhile, deposits grew by 11.75% in FY17 with outstanding deposits of Rs 108.05 lakh crore as of March 2017.

Following this, the banks credit-to-deposit ratio has dropped by 596 basis points year-on-year to 71.8%.

Analsyst at Systematix said, “We expect NII growth for our banking universe to come at a modest 10.6% yoy (7.2% qoq). Going forward, we see credit growth as the key challenge in FY18, since we expect little evidence of commercial credit demand, as banks have negligible sanction pipelines."

While Motilal Oswal expects NII to grow near 5% QoQ (interest reversals on SDR guidelines) and YoY (lower base due to RBI AQR) for state-owned banks. For private banks it expects NII to grow 11% YoY (+3% QoQ) – amongst these mid-sized private banks are expected to report 22% YoY growth.

High NPA provisioning to continue:

Asset quality issue will continue in Q4 given the persistent weak macro-economic environment, leading to further provisioning for NPAs arising from restructured loans and for fresh slippages, said Systematix.

Motilal Oswal factors net slippage ratio of 2.5% (2.4% in 3QFY17) and provision-to-operating profits of 82% (79% in 3QFY17) for state-owned banks and 33% (37% in 3QFY17) for private sector banks. 

Phillip Capital said, "BOB, BOI, and PNB will see qoq falls in GNPA in absolute terms, while ICICI Bank will see a sharp increase due to slippage from its watch list. SBI’s asset quality will remain stable qoq. Axis Bank will also see a sharp rise in GNPA, but high provision will tone down NNPA addition."

Gross NPAs and weak assets are expected to touch about Rs 7.8 lakh crore and Rs 8.7 lakh crore, respectively by March 31, 2017. Thus asset ratios are seen hovering between 9.5% to 10.5% by end of March. 

Crisil said, “With the ageing of NPAs, the provisioning requirements of banks is expected to increase gradually over the medium term.”

Till Q3FY17, major PSBs had double-digit gross NPAs except State Bank of India (SBI) which had GNPA at 7.2%. Punjab Nationa Bank (PNB) had GNPA at 13.7%, followed by Union Bank of India with 11.7%, Bank of Baroda with 11.4% and Canara Bank with 10%.

While major private banks like HDFC Bank, Axis Bank, ICICI Bank, IndusInd Bank and Yes Bank had GNPA in the range of 0.9% - 5.2%.

Systematix said, “The accelerated classification of NPAs under RBI’s AQR that took place last year inflated the NPA provisions base. Hence, most banks are likely to see a higher growth in net profits compared to pre-provisioning profits. The other key monitorable for banks would be the progress of the watch list accounts disclosed.”

For the large-cap PSU banks in Systematic expect weak core pre-provisioning profit growth, and RoAs (annualised) to persist in the range of 0.2-0.5%. For the large-cap private sector banks, the agency expect RoAs to remain 1.1-1.8%. 

Subdued fee income: 

Corporate banking activity has been muted for quite some time now which is expected to have a bearing on fee‐based income. Also, banks seized the opportunity in bond markets in Q3. 

Thus, top-line growth is likely to be muted on YoY basis, due to moderate balance sheet growth, stable/declining margins and moderate fee income growth. While above factors will result in tepid bottom-line earnings for banking sector this Q4. 

Systematix said, "We are cautious on Indian banks in the near term, and expect the macro-economic recovery to be fragile, reflecting the subdued commercial credit demand and asset quality. Hence, we expect banks’ credit growth and consequently profitability to remain tepid in FY18."